(Editor's note: This is the first of a series of excerpts from The Naked Truth: Investing in the Stock Play of a Lifetime, by Mark Faulk. Released in 2008, it is a cautionary true story about a financial system rife with corruption, and predicted last year’s market meltdown. The subject of the book, CMKM Diamonds, Inc. (CMKX), eventually triggered a massive investigation involving the FBI, DOJ, IRS, and SEC, and led to numerous major lawsuits and multiple federal criminal indictments. The Naked Truth: Investing in the Stock Play of a Lifetime is available at www.thenakedtruthbook.com/)
Chapter 39 – A Blueprint for Corruption
"You have to kill the company to hide the crime." ~Bill Frizzell
This story is about CMKX, but it could just as easily be about any of hundreds, or even thousands of penny stock companies. Shareholders invest their hard-earned money only to watch helplessly as potential turns into disaster, and dreams of wealth and riches become nothing more than so many empty promises. This ongoing scheme has been growing unchecked for decades.
It is a complex and well-oiled machine where every component from the paid shills on the message boards to the highest levels of Wall Street represents an important cog in the scheme. None of this is by accident. Every entity and person involved plays a role in the orchestrated scheme to defraud America. Those who are not involved in the actual act of defrauding the middle class are either helping to facilitate the robbery, or destroying the evidence after the fact.
This conspiracy has no clear beginning, and up to now, no ending; it is both carefully planned and self-perpetuating. This example revolves around CMKM Diamonds simply because it is the largest single fraud ever perpetrated in the world of penny stocks. It is the central flashpoint where 50,000 shareholders were unwittingly led into the epicenter of corruption. CMKX was indeed the Perfect Storm. It was a feeding frenzy of excitement evolving into obsession, hopes lapsing into despair, and dreams turning into nightmares.
It’s been said that a person can rob more money with a pen than with a gun. But with the advent of electronic trading, stock message boards, and spam emails, it is the click of a mouse that is the most deadly weapon of all. The details might differ from one scam to another, but the basic strategy is always the same. Stock fraud is a carefully constructed step-by-step strategy designed to rob shareholders, destroy the evidence, and cover the robbers’ trails:
The Blueprint: In the set-ups of the late 1990s and early 2000s, the companies were often victimized by unscrupulous lenders, naked short sellers, and offshore hedge funds, but now the con seems more often than not to emanate from within the companies. The same individuals appear in numerous companies as corporate officers, members of the board of directors, consultants, or simply major shareholders of the various scams that populate the penny stock market.
In the case of CMKX, the wheels of fraud were in motion long before the scam began. John Edwards was setting up fake companies, trust accounts, and trading accounts to launder his share of the spoils. Urban Casavant and David DeSormeau were setting up fraudulent companies like PartTime Management as vehicles to funnel shares of stock and money. Ed Dhonau and Rendal Williams were creating their own “mining” companies to partner with CMKX. Each person involved in the scheme was there for a specific reason, either to set up, facilitate, or perpetuate the robbery. In some instances, their role was simply to provide a distraction before, during, and after the fraud.
The Sucker: It is important for the perpetrators to know who their victims are far in advance. The core group of victims in most cases is comprised of the victims from the just completed scam. The prior scheme often overlaps with the new scam or is carried out as a parallel scheme at the same time.
The core group of shareholders in CMKX originally came from PCBM, a company that cost its own shareholders tens of millions of dollars in losses. In this instance (as is almost always the case), the PCBM scam was fronted by some of the same people who later showed up in one form or another in CMKX, most notably John Edwards, Jeffrey Turino and Adam Barnett. They also shared the same transfer agent – Helen Bagley at First Global Transfer. This was not by accident.
The Pitch: The pitch can be as subtle as a few people pumping the company on popular stock market message boards and sending out spam emails or as blatant as a 50-foot billboard at a racetrack. Surprisingly, these techniques are not only utilized in the penny stock market, but are common in larger companies as well. Because the criminals have gotten away with murder in the loosely regulated pink sheet and OTC stock markets, they have become more brazen and worked their way up to companies listed on the larger exchanges.
As the PCBM scam began to play itself out, the CMKX buzz was just beginning. A few pumpers began posting on the PCBM and other popular penny stock message boards, hyping CMKX as the next big thing. Volume in CMKX was already beginning to pick up, which is usually a sign of buying interest. This is essential, and is often nothing more than an illusion created by the same group of people buying and selling shares to each other. (TO BE CONTINUED)
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